Types

• The IRS requires your employer to give new hires a W-4 form to complete for federal income tax withholding purposes. The state department of treasury requires your employer to give most resident employees a NJ-W4 Form to complete for state income tax withholding purposes. Both forms are called the "employee's withholding allowance certificate."
  
  

Determination

• As long as you are earning wages, you are supposed to pay federal income tax. Therefore, the
  
  W-4 applies to all employees in the United States, except you meet the criteria for exempt as shown on line 7 of the form. If you live and work in New Jersey, you are supposed to pay state income tax. You complete the W-4 and NJ-W4 and submit them to your employer when you are hired and whenever your personal and financial situation changes. If you fail to submit a NJ-W4, your employer can use your W-4 for state income tax withholding purposes.
  
  

Form Completion

• Both the W-4 and NJ-W4 require you to list your filing status and allowances on the form. Your total allowances claimed give you an amount, which your employer subtracts from your gross income to arrive at your taxable income. Be careful when claiming allowances; only claim what you are entitled, since claiming too many can result in you underpaying federal and state income tax and you owing the agency when you file your tax return. Read the instructions on the withholding allowance certificate and complete the form accordingly.
  
  

Tax Calculation

• Your employer uses your W-4 and the IRS Circular E withholding tax table that matches your wages, allowances, filing status and pay period to figure out federal income tax. Your employer uses your New Jersey W-4 and the state withholding tax table that matches your wages after allowances and pay period to figure out state income tax.
  
  

Considerations

• Nonresidents of New Jersey who work in the state must pay New Jersey income tax.
  
  Pennsylvania and New Jersey have a reciprocal agreement, which means that Pennsylvania residents who work in New Jersey do not pay New Jersey income tax. In this case, you complete Form NJ-165 -- Employee's certificate of Non-residence in New Jersey -- and submit it to your employer.